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Chinese Banks Low on Capital

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First quarter reports by five joint-stock banks, the second rung of China's bank industry ladder after the five biggest state-owned banks, have revealed that behind the rapid growth in net profits, capital adequacy ratios have fallen. Some banks have dipped below the regulatory capital requirement.

Given that we'd expect every additional loan in a loan binge to have lesser credit quality than the loan that preceded it, then we should expect that these banks may soon be starved for capital. Where will new capital come from? As I've written before, we may have seen a blueprint in the $6 billion injection China Mobile gave to Shanghai Pudong Development Bank in exchange for a 20% equity stake. In other words, beware the SOE that has been husbanding cash. The government may soon "demand" that cash flow back into the system.